Summarise the disclosure of tax avoidance schemes rule
• States that promoters of tax avoidance schemes must disclose these arrangements to HMRC who will register the scheme and issue them with a reference number
• States that taxpayers who use registered scheme must show its reference number in their tax return
What is the General anti-abuse rule?
- It is a special statutory rule that targets tax avoidance schemes that are outside of the general tax legislation because they are complex or novel.
- They operate alongside targeted anti-avoidance rules (TAAR) and disclosure of tax avoidance scheme rules (DOTAS)
- It allows HMRC to attack tax planning arrangements that were not picked up by TAAR because of how they are constructed.
- It does not cover VAT
What are the rules surrounding transfers income between couples for income tax planning purposes?
- Individuals can transfer 10% of their personal allowance to their spouse or partner provided that the partner does not pay tax higher than the BR
- Transfers must be absolute and unconditional, meaning that the transferring spouse/partner must not have a future benefit from the transferred income or income-producing asset.
- Applies to married couples, registered civil partners and individuals who live together.
What are the rules surrounding income tax for children?
- Children have their own personal allowances and can have tax-free income of up to £12,570 in 2023/24
- Income of more than £100 gross in a tax year gifted from a parent is taxed as the parents income if the child is under 18 and unmarried/not in a civil partnership.
- This includes income of a child’s cash ISA when the capital originated from a parent but to income in a CTF or JISA
- If a child is a beneficiary of a discretionary trust that has not been created by a parent, the trustees can distribute income and the child can reclaim the 45% tax paid on the distribution.
What is the high income child benefit charge?
- Applies to taxpayers who received child benefits and have an ‘adjusted net income’ of more than £50k in a tax year
- The tax charge effectively decreases or completely withdraws the child benefit received by removing 1% of the CB received from every £100 of excess ‘adjusted net income’ over £50,000. This means for anyone with income over £60,000 child benefit is effectively lost.
What is adjusted net income?
- Income after deducting the gross amount of pension payments and donations to charity under gift aid
- This can be reduced by making a pension contribution or donations to charity under gift aid
What are NICs?
- They build up an individual’s entitlement to certain state benefits - primarily the new state pension
- They are paid by employees/ self-employed individuals aged 16+
- Class 1 NICs (employees) and Class 2 (self-employed) NICs stop at state pension age
- Class 4 NICs (self-employed profit related contributions) stop at the end of the tax year in which the individual reaches state pension age.
- The qualifying period for the maximum state pension is 35 years.
List at least 4 benefits based on NICs ….
- New state pension
- New JSA (Class 1 NICs only)
- Bereavement payments
- New style contribution based ESA
- Maternity allowance
List 2- strategies for minimising NICs….
- Taking dividends instead of a salary from a company in which an individual has shares and for which they work as dividends do not count as earnings for NICs purposes
- Increasing the amount the employer contributes to the company pension schemes by salary sacrifice. Employer contributions are not earnings. This strategy may be constrained by the pension annual allowance.
Outline the criteria of Defined Benefits schemes
- Individuals can withdraw benefits at aged 55
- Any amount drawn down in excess of the 25% tax-free PLCS is treated as income and is subject to the normal rates of income tax for the year of drawdown
- Amounts can be withdrawn directly from the pension fund on an uncrystallised basis with 25% of each withdrawal tax free or an annuity can be purchased
- The tax free PCLS is restricted to maximum of £268,275.
- The value of the tax relief on pension contribution is greatest when the tax relief on the contributions is greater than the tax on the benefits. So, there is likely to be some tax advantage simply because the tax-relievable contributions generate a fund from which the member can eventually draw 25% as a tax-free PCLS.
What is the tax treatment of pension scheme
- The tax position of the pension fund is the same as the tax position of ISAs and offshore bonds. The difference lie in the tax treatment of the initial investment and the encashment proceeds of these various plans.
- For a basic-rate taxpayer, the lifetime ISA effectively provides the same tax relief on initial investment as pension savings, but with tax-free withdrawals. It may therefore be a more attractive approach to retirement saving for some individuals.
It is possible to contribute up to £3,600 gross in a tax year to a registered pension scheme for a partner or children with little or no earnings, so the contributions benefit from tax relief at 20% (2023/24), even if the individuals themselves do not actually pay any tax.
When might it be appropriate to transfer a pension into trust?
- When an individual wants to ensure that the benefits are retained within the family should a spouse of partner remarry upon their death
- If beneficiaries are aged under 18
- To remove death benefits from any assessment on a spouse or partner for LTC purposes. Funds in a trust cannot be taken into account by a local authority when assessing assets or income.
What is the tax treatment of pension benefits placed in trust?
- PLS death benefits paid into a trust are tax free if the member dies before aged 75
- Benefits paid on a later death are taxed at 45%
Inheritance Tax Planning - Non UK Domiciled spouse or civil partner
- There is a restriction on the IHT spouse or civil partner exemption. The exemption is limited to £325,000 if assets pass to a spouse or civil partner who is not domiciled (or deemed domiciled) in the UK for IHT purposes.
Inheritance Tax Planning NRB & RNRB
- Any unused nil rate band of the first in a married couple or civil partnership to die can be claimed by the personal representatives of the survivor within two years of their subsequent death.
- The Residential nil rate band is also transferrable, and this will not be normally used on first death as the family home is likely to pass to the surviving spouse or civil partner.
When might an individual make use of the nil rate band on first death?
- When the asset transferred away from the spouse is expected to grow in value faster than the nil rate band or when second marriages are involved.
- It might also be advisable when a widow or widower would otherwise inherit more than one nil rate band and the excess would be wasted.
- There may also be some benefit in protecting assets should the survivor need to go into care.
Any transfers must be outright and unconditional if the recipient is thinking of making gifts of these assets in the future
What are the anti-avoidance rules for Registered Pension Schemes?
The anti avoidance rules for registered pension states:
Once a pension fund has been accessed flexibly, the future level of annual allowance is reduced to £10,000. (This is the Money purchase annual allowance - MPAA)
The MPAA generally applies regardless of the method used to access the pension fund
It is not triggered if only a pension commencement lump sum (PCLS) is taken (without any flexi access drawdown) or if a non-flexible annuity is taken.
How are ISAs treated for tax purposes?
All income and chargeable gains are free of tax and do not have to be declared on a tax return. However, investments may suffer foreign withholding taxes.
- Interest received on bond investments is tax free.
- All ISA encashments are free of income tax and CGT.
What are UK Collectives and what investment products can they be held in?
These include:
- Investment trusts
- Unit Trusts
- OEICs
They can be bought and held by individual investors or within tax wrappers I.e., ISA & SIPPs
What are the life company taxation rules for on shore life assurance policies?
The fund pays tax at 20% on:
- interest income, property rental income and offshore income gains.
UK dividends are generally exempt from tax.
If the fund sells any assets at a profit, it pays tax on any gain at 20% (with no relief given for inflationary increases arising from January 2018 onwards as a result of indexation allowance being frozen at December 2017).
These taxes are paid directly by the life office, so do not involve the policyholder and cannot be reclaimed by any policyholder
What are the life policy holder taxation rules for on shore life assurance policies?
Policyholders can be subject to income tax as savings income on policy profits. These are often called chargeable event gains, although they are not subject to CGT.
In what situation will policyholders of onshore life assurance policies be subject to income tax as savings income on policy profits?
Tax is only payable if:
- a chargeable event happens
- a chargeable gain arises
- when the gain is added to the taxpayer’s other taxable income for that year, all or part of it falls within the higher- or additional-rate tax brackets.
- An additional tax liability may also arise if the taxpayer is entitled to Universal Credit or tax credits when the gain results in the personal allowance or married couple’s allowance being reduced or lost, or when the gain creates or increases a high income child benefit charge
List 3 chargeable events for non qualifying life policies:
- death (if it gives rise to the payment of a benefit);
- maturity;
- surrender;
- certain part surrenders;
- policy loan; or
- assignment for money or money’s worth.
What is the maximum an individual can contribute in a Registered Pension Scheme?
Employees and self-employed people aged under 75 can contribute up to 100% of their earnings to their pension scheme each year and receive tax relief.
Combined employer and employee contributions up to an annual allowance (£60,000) are allowed with no adverse tax consequences.
People with little or no earnings can contribute up to £3,600 a year and qualify for basic rate tax relief.
